Fund managers rally IFA backing for FSCS reform

It has been more than a year since the Financial Services Compensation Scheme (FSCS) landed IFAs and fund managers with a £326 million bill relating to the collapse of Keydata, but the fallout is far from over, according to the Investment Management Association’s (IMA) Guy Sears.

IFAs versus fund managers

Sears (pictured), the IMA’s director of wholesale, said the need to reform FSCS funding had its roots in the £326 million levy, which had divided IFAs and fund managers when they should be working together. The FSCS’s 2011 Keydata levy landed IFAs with a £326 million bill to cover compensation paid out to clients in collapsed investment firm Keydata Investment Services.

The size of the bill was well over IFAs’ £100 million FSCS levy limit, resulting in the remaining £226 million being footed by the next subclass in line, fund managers.

As a direct repercussion of the huge levy, the FSCS decided to pursue legal action against hundreds of Keydata-selling advisers in a bid to recoup the money it had paid out. There were also even louder calls to overhaul the scheme’s funding model.

These calls were answered in July by the Financial Services Authority (FSA), which published a consultation outlining a number of measures to alter the way the scheme was paid for.

FSCS reform suggestions

For Sears, however, the FSA’s proposals do not go far enough, and he and the IMA have backed up their gripes by publishing their own set of proposals to reform the FSCS.

‘We took what the FSA talked about, and we felt they hadn’t worked it through sufficiently,’ he said. ‘We felt what little they did discuss within the paper was so little discussed, it was just asserted in a few places.’

The IMA has proposed the use of reserve funding and three-year forecasts instead of pre-funding or a product levy, arguing the latter proposals would distort the market for funds and could make UK funds more expensive.

Sears said: ‘Pre-funding or a product levy is something that has to be discussed on an European basis. While I completely understand that for many IFAs, the scheme affects their competition with one another and their ability to do business, when you look into funds, you’re looking at us as European distributors. If the UK alone did something, it would distort the UK market.’

Focus on common ground

While Sears acknowledged IFAs and fund managers held different opinions about some aspects of the FSCS, he was keen to play down their divisions, focusing on common interests instead.

He said the IMA had told the FSA it was disappointed compensation was paid to Keydata investors who did not pursue complaints against their intermediaries because it undermined the type of consumer discipline that should be encouraged.

‘What if it turns out that, having paid out, the courts rule finally that there’s only £100 million of unsuitable advice?’ he said. ‘That will raise very interesting questions. The scheme’s processes will be questioned.’

He argued the IMA’s commonality with advisers extended to the trade body’s support for the FSCS’s legal battle against hundreds of Keydata-selling IFAs.

‘If you ask: “Does the IMA encourage the scheme to ensure there’s a proper look at who is liable to for the losses?” I’d say: “Yeah, we do.”

‘I hope we did have a part in it [the FSCS’s decision to take legal action], and I think they should go after them [IFAs who mis-sold Keydata].’

Sears said despite the controversy surrounding the FSCS’s legal battle, it was in the interests of IFAs who had not sold Keydata but still paid out.

‘We don’t see why this was portrayed as an IFA versus fund manager debate.

‘What we have said is if individual IFAs have mis-sold Keydata and given bad advice, we don’t see why any of us should have to pay for that.’

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